A Prolonged Market Erection Can Lead to Permanent Economic Damage

Gold was hammered last night…down US$40/oz.

Apparently, a mixture of good news caused the selloff in the precious metal.

Concerns over Deutsche Bank’s demise have abated. The better than expected US manufacturing data puts a Fed rate rise back on the table later this year (meaning investors can get a tiny bit of yield compared to gold’s zero income return). And Julian Assange not releasing — as promised — more dirt on Hillary keeps her as the frontrunner for the Oval Office.

Wall Street was a bit miffed about the prospects of a rate rise, resulting in the Dow falling around 90 points. Bear in mind that it’s only a ‘prospect’ at this stage, and we’ve seen this movie (‘I’m gonna raise rates, I really am’) a few times before.

Speaking of raising things, are you familiar with the story of the drug sildenafil citrate?


Sildenafil citrate was created in 1989 by Pfizer scientists Peter Dunn and Albert Wood as a treatment for high blood pressure and angina. The patent for the drug was lodged in 1991, and clinical trials began soon after.

Patients reported no improvement in their condition. As a treatment for heart disease, sildenafil citrate was ineffective.

However…after taking sildenafil, the male volunteers did report a significant increase in blood flow to their nether regions. Happy days were here again.

Sildenafil citrate is better known these days as Viagra.

After its first year on the market, research was presented at the Annual Scientific Session of the American College of Cardiology suggesting overuse of Viagra was the probable cause of 522 patient deaths.

Dr Sanjay Kaul said ‘Our data appear to suggest that there’s a relatively high number of deaths and adverse cardiovascular events associated with the use of Viagra. I want to emphasize that in no way are we trying to imply a cause-and-effect relationship.

Some blokes just don’t know when to stop.

According to Medical Daily: ‘Men are likely to use the blue pills because sexual performance is a high priority for them, which can consequently lead them to abuse and overdoses.

That is hardly earth-shattering news.

However, the side effects of abuse and overdose can lead to priapism, which is better left to Medical Daily to explain: ‘…an uncomfortable and disproportionately large erection that lasts for more than four hours. A prolonged erection can lead to permanent damage to the penile tissues.


For the record, I am wincing while writing this.

Anyway, the pain doesn’t stop there. If the ‘tent peg’ stays up, surgery could be required to reduce the swelling. Hardly the outcome one expected when popping the pill.

The side (or if you like, front) effects don’t stop there. According to the Mayo Clinic:

…Viagra is a drug that enhances nitric oxide, which is a vasodilator — it can lower blood pressure — too much can lead to an increased risk in cardiovascular difficulties from blood pressure fluctuations to heartbeat irregularities. Other common symptoms include blurry vision, sudden decrease in hearing or loss of hearing, accompanied by dizziness and ringing in the ears.

While there is one rather obvious benefit from Viagra — the stimulation of what at least half the population considers a vital organ — it does come with risk. Excessive stimulation lands you on the operating table or, worse still, burial in box with ‘extra high’ clearance.

Ok, but what has Viagra got to do with financial markets?

I’m glad you asked.

The Japanese discovered the drug called Quantitative Easing (QE). This wonder drug of printed money was supposed to get their limp — and getting limper — economy upright again.

There was the occasional stirring in the economy, but nothing that was lasting enough to consummate the deal between manufacturers and consumers. The love was gone.

Consumers were ageing and losing interest in what once was fun, carefree, uninhibited and exhilarating…the immediate gratification of debt-financed consumption.

For more than a quarter of a century, Japanese governments have been trying to ‘get it up’ to no avail. They’ve tried everything: QE, more QE, asset buying, currency manipulation, negative interest rates and, don’t forget, Abe’s three arrows…but nothing’s happening. The economic ‘sausage’ lies prone and is, in fact, shrinking.

However, the side effect of all this economic stimulation has been to ‘put lead in the market’s pencil’.

The Japanese share market is up 50% since Abe fired off his three arrows and negative interest rates delivered long term bond investors windfall gains.

The economic heart is still weak, but the financial organ is well and truly on the rise.

The Fed — when faced with its own economic dysfunction in 2008 — dispensed with their version of the Japanese ‘cure’. The Fed spiced it up a little with some TARP (Troubled Asset Relief Program), Cash for Clunkers and bank guarantees.

A potent concoction for an impotent economy.

After eight years of popping ‘blue pills’ of different sizes and in varying quantities, did the US economy rise to the occasion?

According to the US Government Congressional Research Service report, ‘Economic Growth Slower than Previous 10 Expansions’, published on 30 June 2016:

…the current economic recovery is the slowest recovery seen in the post-WWII period era. Real GDP has grown at an average pace of 2.0% per year during the current recovery, compared with an average rate of 4.3% during the previous 10 expansions.

Verdict: The US economy has still not recovered from its 2008 heartache.

However, the Fed’s ‘blue pills’ were never really meant to treat the economic heart disease that is excessive debt. It was always about creating the wealth effect.

In generating blood flow to markets, rising asset prices would, in turn, produce a feel good effect, and the love would be shared by all.

Well, 99% of people did get the shaft, but not in the way the Fed’s model had predicted.

The one percenters have indulged in an orgy of free and abundant money. Obscene levels of wealth have been created by the Fed’s actions, but precious little of this has trickled down to the majority.

The US share market has risen to a record high on the back of the weakest economic recovery in 70 years.

By historical valuation methods, the US share market is reaching a level of arousal seen only twice before — in 1929 and 2000. And we know neither of these ended happily.

To paraphrase the Medical Daily, ‘A prolonged market erection can lead to permanent damage to the economy.’

The Fed and other central bankers have overstimulated asset prices. The markets are permanently horny, and the mere thought of taking away the ‘blue pills of zero interest rates’ do their heads in.

The stimulants have nothing to do with curing economic ills; they are all about keeping markets up.

At some stage, the side effects of underemployment, stagnating wages, increased welfare dependency, rising debt levels, increased budget deficits, and savers being demoralised will overwhelm the economic body.

When that happens, markets are going to be hit with a spoon so cold it’ll bring tears to your eyes.

This story does not have a happy ending.


Vern Gowdie,
For Markets and Money

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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